The culture minister Ed Vaizey, who announced the BFI's new role today. Photograph: Nils Jorgensen/Rex Features The British Film Institute will distribute lottery money to film-makers from next year, ministers announced today, ending – they hope – an acrimonious row that even prompted Clint Eastwood to write a concerned letter to the chancellor.

The government revealed its plan to abolish the 10-year-old UK Film Council in July. Even those who sympathised with the decision criticised the lack of a plan for who would take over.

Today the culture minister, Ed Vaizey, tried to alleviate those worries by announcing the BFI would take on most of the UKFC's functions apart from the task of encouraging inward investment, which would be in the hands of Film London.

Vaizey said the BFI would have to "change fundamentally" to be "more able to realise an exciting vision of a coherent, joined-up film industry".

It will be responsible not only for heritage and education, but for helping the production, exhibition and distribution of new British films.

In a speech at Bafta's headquarters in London, Vaizey said the intention was to build on the already considerable achievements of the British film industry. "Despite the success, we cannot be complacent," he said. "The goal of a sustainable, independent British film industry remains as elusive as ever."

The BFI immediately announced a rise in the money available for new films in the coming year from £15m to £18m, made possible by the cut in overhead costs because of the film council's abolition.

More than a year ago the Labour government planned to merge the BFI with the film council, with the BFI as junior partner. Today's announcement, a merger in all but name, puts the BFI in charge.

Its chairman, Greg Dyke, said: "It makes sense for there to be a single voice for film in this country - and that's going to be us." He added: "We can certainly do it significantly cheaper ... how much cheaper, we don't know yet. The UK Film Council carried quite a large overhead."

There are still lots of questions. How much bigger will the BFI have to become? How much more money will it get? How many film council staff will transfer? Vaizey said he expected a detailed transfer plan to be sorted in the new year.

He reaffirmed that lottery funding for film would rise from £27m to more than £40m by 2014 and said there were no plans to change the tax credit scheme which has encouraged Hollywood studios to make films in the UK.

Vaizey praised Channel 4 and the BBC for its investment in film-making but said he could not understand why Sky did not make films. "As one of the country's most innovative broadcasters, they would bring a new dynamic force to the table that would lift everybody's game."

The job of attracting foreign – principally Hollywood – studios to Britain will go to Film London, but Vaizey stressed that it would be working for the whole of the UK, not just the capital.

The announcements were generally welcomed by the industry. Film producer David Parfitt, incoming chairman of Film London, said: "The key thing for us is that the money is still there and there is a promise to increase it and also a guarantee of the long-term future of the tax credit.

"Those are the things that the industry really wanted to hear."

There was a more understandably downbeat response from the UKFC as it continues to help out in its own abolition. Tim Cagney, managing director, said: "We are relieved that, after over four months of uncertainty, the government has made up its mind on where public support for UK film will sit. There are still many unresolved issues so, to benefit the industry and to protect our staff, we will continue to work with the relevant organisations on a smooth handover of film functions and expertise."

Privately, ministers acknowledge that the film council's abolition was badly handled. It led to angry letters to newspapers, and the culture secretary, Jeremy Hunt, even travelled to Los Angeles to assert that the UK was open for business when it came to film.

Since then, Vaizey has consulted widely and also announced today that he was setting up a ministerial film forum to meet every six months or so to debate issues and concerns.

Vaizey also announced that the eight regional screen agencies outside London would be streamlined into a single body, Creative England.

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